Wednesday, 31 May 2017

I asked (post of 5 March) if standards of political debate were at an all time low. As usual, they are the lowest we have ever seen, at least since the last election (or referendum). David Smith thinks so, writing in The Times* that "There was something close to consensus last summer that we could not do much worse, when it came to intelligent debate, than the EU referendum. For the politicians, unfortunately, this election is proving that we can indeed do worse, and are." He notes that Carl Emmerson of the Institute for Fiscal Studies says that neither of the main parties is offering “an honest set of choices” to voters, and that it is a choice between the “undeliverable” (Tories) and the “unworkable” (Labour).

Smith himself is very downbeat about the medium term whoever wins: "We have had the Brexit devaluation, the Brexit downgrading of Britain’s sovereign debt rating and the Brexit increase in inflation. We are seeing the Brexit fall in real wages, which will drive the Brexit slowdown in the economy. The fantasy of a Brexit bonanza for the public finances, always a nonsense, will be replaced by the reality of larger budget deficits and increased government debt." That is leaving aside the huge task of negotiating Britain’s exit from the EU: Smith has said previously that he thinks Theresa May and her government are some way off the pace when it comes to the forthcoming EU negotiations.

And he doesn't like her policies much either: "There was the usual weak “industrial strategy” stuff and the flannel, perilously close to Labour’s campaign slogan, of running the economy for the many and not just the “privileged few”. The many, it should be noted, are enjoying record employment, and inequality was falling long before Mrs May became prime minister. It is likely to rise again over the next few years. On immigration, meanwhile, the approach of her government, including the “tens of thousands” net migration target, increased costs for employers of taking on non-EU nationals and tougher controls of legitimate students, smacks more of Prisoner Cell Block H than the openness favoured by many Brexiteers and non-Brexiteers alike."

But the alternative is no more appealing: "Labour’s programme, intended to appeal to its core support and prevent an election whitewash, would be economic sabotage if ever implemented. If you were designing a set of policies to ensure that the economy suffers even more than necessary in the wake of Brexit it would be hard to beat Labour’s signature tax pledges......On the basis of these, Frankfurt, Paris and Dublin will be rooting for a Corbyn victory, as will every location in the EU keen to grab some of the foreign direct investment previously claimed by Britain, and to attract some of that driven out of Britain by punitive and ill-judged tax policies."

Smith asks if there any reason to be optimistic. "With Labour, probably not. With Mrs May’s Tories, the hope has to be that they are diverted away from some of the dafter interventions and controls. But if the best you can wish for is that parties do not carry out their promises, it confirms that this is a bad election."

I'm writing this while Mishal Husain is struggling to stop seven dwarves shouting each other down in the BBC election debate while Snow White, or should that be the wicked queen, stays in her lair. From what I saw, I enjoyed Tim Farron's contributions the most. At least he made me laugh. Mind, he has the liberty of not having to appear prime-ministerial (which could be difficult for him anyway). I don't know whether humour will have helped the Lib Dem vote, though I had been looking forward to having a chuckle at Diane Abbott until Corbyn pulled rank - not surprisingly after his competent showing against the clearly past his sell by date and out of practice Paxman a few days ago. Though if I was Labour I'd have fielded the terrifyingly plausible John McDonnell, the thought of whom as chancellor reminds me that this isn't about laughs.

I enjoy following politics but even I am thinking "roll on June the 8th".

Tuesday, 30 May 2017

I've just been skim reading a fascinating overview of the world economic outlook, with a breakdown by region, by Ray Dalio - no, me neither, but he's Chief Investment Officer at Bridgewater Associates, which is the world's largest hedge fund, so I sat up and took some notice.

He describes the current economic situation as being "mid-cycle" - after all, everything goes in cycles - and "Goldilocks", i.e. not to warm and not to cold, so just cosy. Debt levels which were very high have come down, interest rates are low and there is plenty of liquidity, in other words money is available. But there are significant long-term problems, in particular high debt and non-debt obligations and limited abilities by central banks to stimulate if the need arises, that are likely to create a squeeze. Also social and political conflicts are near their worst for recent decades and conflicts get worse when economies worsen.

So while he sees no near-term economic worries for the economy as a whole, he worries about what these conflicts will become like when the economy has its next downturn.

He reminds us that there are 3 big forces that drive economies: the normal business and short term debt cycle that usually unfolds over 5-10 years, the long term debt cycle and productivity. He sees nothing much to worry about in the short term but the longer term outlook worries him, there is a lot of debt and a lot of non-debt obligations (pensions, healthcare entitlements, social security, etc.) coming due, which will increasingly create a “squeeze”; this squeeze will come gradually, not as a shock, and will hurt those who are now most in distress the hardest.

The central banks’ powers to rectify these problems are more limited than normal, which adds to the downside risks. This is because they have limited abilities to lower interest rates from the historically low levels where they are now and because increased QE would be less effective than normal "with risk premiums where they are". (Personally, I'd say that this weapon has been overused and there aren't so many obvious target assets for central banks to buy if they need to increase liquidity). He also says that effective fiscal policy help is more elusive because of "political fragmentation". I take this to be polarisation in the US but he may mean more broadly. Either way, he fears that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, it is likely to produce much greater social and political conflict than currently exists.

He goes on to look at how the economic position has evolved over the long term globally and in the major trading blocks. By the standards of the last 50 to 100 years, the amount of slack in the world economy shows we are as close to equilibrium as things get, asset prices look about right from trends over the same time periods but debt is pulling away from our ability to service it as a proportion of GDP and productivity growth - the key to raising living standards - is weak and slowing while his measure of conflict - the share of US newspaper articles covering political conflict - is at a high and rising (but then we do have President Trump, so I'm not entirely convinced about that measure!)

He concludes "Downturns always come. When the next downturn comes, it’s probably going to be bad."

I'll leave you to look at the graphs and read his analysis of the US, Eurozone, Japan, China and emerging markets excluding China for yourselves*. Thought provoking stuff, but the sun is shining at the moment so we should make hay (or mend the roof to quote an ex-politician, even though he didn't actually do it, which does make me nervous).

Indeed, my economics guru, David Smith, ran with the theme of borrowing storing up trouble in his column the week before last**. He noted that the Bank of England has expressed concern about the rapid growth in consumer credit, currently rising the fastest since the financial crisis. The Prudential Regulation Authority, part of the Bank and responsible for regulation and supervision of banks, other credit providers and insurance companies, is looking into whether credit quality is suffering and the Financial Conduct Authority is examining assessments by lenders of the creditworthiness of borrowers. Along with several other commentators, Smith has picked up the large increase in unsecured debt on new cars bought with finance, which is now 86.5% of new cars bought in the UK. Some have gone as far to suggest this is another sub-prime banana skin in the making. I find this a bit surprising as cars are a fraction of the cost of houses, the debt is much shorter term and the finance arms of the big car manufacturers catching a cold doesn't seem likely to me to tilt the world into recession, unlike major bank failures. But a number of non-financial journalists have only just seemed to realise why there are so many new cars on the road these days and how come young people can afford to drive round in fancy new SUVs. I'm not sure where they have been sleeping - I hope the Bank of England hasn't been sleeping either. It would be a spectacular own goal to have introduced the remarkably tight controls that they have on mortgages only to treat car loans in the same lax manner as credit cards.

Whatever, the rise in unsecured borrowing since 2013 is causing debt to rise again, after it had fallen in cash terms following the credit crunch. People seem to have got comfortable with high debt again and that makes Smith uneasy (and therefore me too). Smith notes that this has happened before memories of the crisis have faded, a process that has been aided by ultra low interest rates. Which of course are part of the problem. In a pattern that the MD of Fathom Financial Consulting says is familiar from Japan and elsewhere, any pauses in the rise in debt are short lived, as the record low interest rates encourage more debt to be taken on. The problem for central banks is that further cuts in rates, or any other relaxation of monetary policy, have little effect, but raising interest rates, even by a small amount, would have significant negative impact because of the high debt levels. We have got ourselves into a position where only a small increase in rates is needed to make people squeal with pain, with all the implications that has for impact on the overall economy.

While the Bank of England does not expect to raise interest rates soon, if the economy develops in line with its latest forecast (which presumably factors in Brexit) it does not expect to keep rates on hold until 2019, as markets had been expecting. Smith notes that the crunch would come if a situation arose where rates needed to be pushed higher because of inflation, which would plunge quite a few households into distress. Accordingly he expects only small increases, with the Bank aiming for a "new normal" of 2%, though not for some time. Even that rate, he notes, may be too high for many. After all, incomes have stopped growing faster than inflation, after a brief interlude of increasing living standards, so debt ain't going to get paid down very much.

But, while I am very reluctant to differ from my guru, I guess that small increases in rates would therefore have an accentuated effect in squeezing out inflation and so my concern is more on the lines of Dalio's: if economic storms hit, then further quantitative easing will have less effect and interest rates are already close to zero, so the central banks won't have levers that will work. To state the blindingly obvious, the world has not returned to normal economic times when interest rates have been at record lows for record lengths of time, with no sign of a return to anything like normal norms. (Are there any other type of norms? Answers on a postcard....)

Friday, 19 May 2017

My first reaction when Mrs May called the election was that the reasons for calling it were essentially party political, even though she blamed opposition parties. After all, it looked good timing to increase her majority (David Smith, Sunday Times Economics Editor thinks they hit the sweetest spot in he economic cycle with the economy already slowing) and the LibDems played into her hands by threatening to "grind the business of government to a standstill". But I felt the main reason was to avoid being too much in the control of her euroseptic wing. Not a spelling mistake there by the way: there are eurosceptics, europhobes and the right-wingers who foam at the mouth when Europe is mentioned, hence euroseptics. With a small majority, Mrs May could find herself beholden to them as the negotiations unfold, depending on how reliable Labour MPs proved to be: not a comfortable position to be in. So I felt that, like the referendum itself, the election had been called to resolve an issue within the Tory party.

However, I became pretty much convinced by the argument the Tories put forward that the election due in 2020 would inevitably influence the closing stages of the Brexit negotiations. It seems to me that would definitely have been the case and, if you were in any doubt, the subsequent leak after the May-Juncker Chequers dinner proved the point.

In passing here I note that I have said several times - e.g. see post of 25 October 2016 (Cold Front at Calais) - that the negotiations will be difficult because it isn't possible to negotiate with a self-harming psychopath. By which I meant that the European project matters more to Brussels than the well being of the people of the EU. Accordingly all the arguments on the lines that "they sell more to us than we sell to them, so they'll want to do a deal"; indeed that "they'll want to sell us their Prosecco" (Boris Johnson) don't hold water because, to Brussels, this isn't the transactional, optimise it for all parties, commercial deal that the Brits would expect to be able to do. By psychopath I was referring to the Brussels eurocracy in general, but now we know he has a name: Martin Selmayr, the Chief Of Staff of the European Commission President. It was Selmayr who was accused of leaking an alternative version of the truth after the dinner, with May portrayed as being in a different galaxy in an attempt to derail the negotiations before they even get going.

The phrase that came out after the Chequers dinner leak was "Brexit cannot be a success". Well, if your view is that Brexit is inevitably a disaster and all parties will be worse off then, in your book, no it can't. I'm sure Selmayr believes that. But, even if it doesn't have to turn out that way, he doesn't want it to be a success as that would potentially lead to other countries leaving, so it mustn't be a success from the point of view of the EU "project", even if EU citizens are worse off. Hence the self harming bit, which we already knew.

The psychopath was revealed by the leak. According to Tim Shipman* May's team seethed for 3 days before they realised Selmayr had presented them with a political opportunity. And one that, counter-productively from Selmayr's point of view, could strengthen the hand of the British negotiators. My reaction when Theresa May gave her press conference lambasting the leak and talking about interference in our election was that she was taking a risk. But I quickly came to the view that it would have been a bigger risk not to speak out. Of course, those wanting to see the negotiations fail were delighted, while also saying that this is no way to negotiate with your closest neighbours. But most divorces end up in an argument about money and access, so why should this one be different? And, if you have to negotiate with a psychopath then some firm tactics will be necessary from time to time.

So I think May was right to call the election and I found most of the criticism, which came from people who said she should have called one as soon as she took over, hypocritical. After all, the electorate have now had a chance to see what she's like in action and have a better idea of who they are being asked to vote for as PM. Be that all as it May, the Tory party seems more united than at any time since the 1980s, albeit fighting on a manifesto that leaves me thinking there is no pro-business**, economically "dry" party standing in this election. Ironically, with Labour at its weakest for 30 years, the manifestos of the three main parties have a rather leftish feel to them, with the Tories promising to intervene on executive pay and energy markets, sensible though that may be depending on how it is done. As a result, the Sunday Times said in its leader last week that the Tories risk winning the war but losing some important battles over free markets and sensible taxation unless the lessons of the Thatcher era (competition is good, markets work, low taxes are essential for prosperity and opportunity) are reinforced. So, given the only question about the election outcome is the size of the Tory majority, the greater interest is what will happen to Labour when internecine war resumes.

Casting our minds back all the way to last summer, a key moment was the legal battle for Jeremy Corbyn to stand for re-election when he was challenged. That battle won, the entryism project to take control of the Labour party seemed well on track. After all, he was otherwise unlikely to find enough moderate stooges to sign his nomination papers again, as happened the first time round. Those stooges, together with Ed Miliband's change to one member, three quid, one vote*** gave the left the opportunity they've been looking for over a very long time. The next step seemed likely to be the de-selection of moderate Labour MPs as parliamentary candidates to give the moderates no way of fighting back. But the election was called before this could happen and the sitting Labour MPs had the chance to stand again. Since Labour's core vote is geographically more concentrated than the Tories or LibDems, almost however hard they get squeezed there will still be a substantial number of Labour MPs. So the next Parliament will be quite like this one in terms of Corbyn being out of step with the majority of his MPs. So, in calling the election when she did, has Theresa May given the Labour moderates the chance to win their party back?

I don't know enough about the way the Labour party works in practice and control of the levers of power in terms of changing the way the leader is selected for example, to answer that question, but I suspect it will not be easy. Indeed, conspiracy theorists have suggested that the Corbynistas aren't bothered if Labour lose a fair number of seats, since Corbyn's supporters generally have the safer seats. If Labour is squeezed down to 150 MPs then Corbyn would have no problem getting the required proportion to nominate him next time round. Hence the suggestion that what Labour is concentrating on in the General Election is maintaining it's core vote. Even a showing as bad as Michael Foot's in 1983 will be dressed up as some kind of success.

In this context their manifesto makes perfect sense. It may not be the longest suicide note in history even if it is certainly a long wish list of unaffordable (yes, we'd all like to spend more on the NHS and education and everything else, but how will it be paid for?), unworkable (sure, raise corporation tax but when it was cut the revenue increased so what do you think will happen? And at a time when we need to keep businesses in this country) and irrelevant (nationalise the railways - oh and no further expansion of driver only operated trains even though they've worked well on some lines for decades but you have to throw some sops to your paymasters) policies. David Smith called it "snake oil that may not make any sense but could be quite popular". Indeed, YouGov say people favour re-nationalisation of the National Grid, railways and Royal Mail 46% to 35% (what - don't they remember how unutterably crap British Rail was? And yes, it was starved of investment but what would happen again under the public sector yoke?); they favour scrapping tuition fees by 49% to 36% (which would mainly benefit the middle classes ironically) and, not surprisingly, they favour higher taxes for those earning more than £80k by 58% to 26. Although more evenly split, many also favour higher corporation tax, which Smith branded "really dumb" in an open world when exiting the EU will magnify the effects on the willingness of businesses to invest and recruit. "At a time when continuing to attract foreign investment will be paramount, erecting a large sign saying 'we will tax you more' conveys the worst possible message." #

But what Smith overlooks is that the Labour manifesto isn't intended win a General Election, but it makes sense against the goals of the entryists. After all, if Labour can just get through this election in one piece, then they can hope that the wheels will come off Brexit, or the economy, or both. Governments always eventually become unpopular. And then who will win the next election? No other party is likely to be in a position to form a government. Having established their credentials with their supporters this time round, the next manifesto could be written with the vagueness that a party ahead in the polls can get away with.

The other point about the Labour manifesto is that some of the people behind it want the economy to crash, to prove capitalism doesn't work. One is John McDonnell of course, whose Who's Who entry (had to think for a moment there!) famously listed his hobby as "fermenting [sic] the overthrow of capitalism". So illiterate as well as economically illiterate then. But, if you don't believe me about entryism, remember Andy Murray. Well actually, not being the tennis player, he's known as Andrew Murray. He's the Chief of Staff of Unite, Len McCluskey's union and was recently seconded in to help with the Labour election campaign. Murray, who's real name is Drummond-Murray, is the son of a titled stockbroker and banker and went to a public school (so a class traitor then, to do a bit of nomenclature appropriation). He joined the Labour party in December last year, having previously been a member of the Communist party, which he joined in 1976. He joined as a teenager, but it took a long time to grow out of it as he was a member for over 40 years. As well as his work as an official for several trade unions, including at BA where he helped to "ferment" the BA cabin crew strike of 1997, he wrote for the Morning Star and, for 9 years, for the Soviet Novosti news agency##. Murray's hero is clear if you visit his office at Unite - he has a large photo of Lenin on display - and their are few far left causes he has not espoused, declaring "solidarity" with North Korea, praising Hugo Chavez of Venezuela and railing against imperialism. These are the people who are using Corbyn's duffer-like persona to take full control of the Labour party.

So, could the moderates conceivably take back control after a heavy General Election defeat? Has Theresa May saved the Labour party? I personally doubt it. Where are the people who might have had the balls of a Roy Hattersley to stand up against the new militants? Balls shimmied off to Strictly after all. But the other possibility is that a large group of moderate Labour MPs could form their own break away party. Some have already given it a name: the Progressive Party. Some see the hand of Tony Blair behind it. Blair's brand is so tarnished that he would have to stay in the background else any such initiative will be doomed but, if we were talking about a hundred MPs defecting then one could imagine the party having some momentum against Momentum Labour. The formation of the SDP by the gang of four (Owen, Jenkins, Williams and Rodgers) in 1981 showed that a much stronger starting position is needed to break the mould (if you remember that phrase). And we've seen with UKIP's failure how difficult it is to get established in Parliament from a standing start.

Presumably a group of a hundred moderate Labour MPs by another name would become Her Majesty's official Opposition and would get more air time than "Old" Labour. (Sorry, but I'm enjoying playing around with these terms more than I should - it would all be lost on millennials!). So maybe Theresa hasn't saved Labour but, in ensuring the moderates get one more shot at being in Parliament, could prove to be the midwife for the birth of a moderate left of centre opposition that could one day form a government.

Fortune will favour the brave. If some moderates stay and some go they will surely fail. And then I fear that a Corbyn (or worse) led government could just happen, like a slow motion car crash.

I think you can tell that I think the current General Election campaign isn't shaping up to be that interesting or important. But what happens over the next couple of years is going to be fascinating. I'm just not sure I wanted to be part of it.

* Rasputin of Brussels Gets A Taste Of His Own Poison, Sunday Times 7 May 2017
** I mean here pro-business in the sense of supporting growth, employment and the generation of the wealth and taxes that pays for public services.
*** strictly it wasn't one member-one vote as the three quiders were "registered supporters", so not even members
# David Smith, Economic Outlook, Sunday Times 14 May 2017.
##https://en.wikipedia.org/wiki/Andrew_Murray_(campaigner_and_journalist)